The Supreme Court ruled that employers have the right to set hiring rates based on market conditions, even if it leads to wage similarities between newer and older employees. This decision clarifies that wage increases due to market adjustments do not automatically constitute a violation of collective bargaining agreements (CBAs) or create wage distortions. It reinforces the principle that management has the prerogative to make business decisions, provided they are exercised in good faith and do not circumvent employee rights.

When Hiring Rates Clash with CBA: Can Employers Adjust Wages Freely?

This case revolves around a dispute between the Philippine Geothermal, Inc. Employees Union (PGIEU) and Chevron Geothermal Phils. Holdings, Inc. regarding wage increases. The union alleged that Chevron violated their CBA by granting salary increases to probationary employees, Sherwin Lanao and Jonel Cordovales, before they attained regular status, leading to wage distortion. The core legal question is whether the increases were a violation of the CBA or a valid exercise of management prerogative to adjust hiring rates.

The petitioner, PGIEU, argued that Chevron’s actions contravened Article VII, Section 1 of the CBA, which outlines wage increases for regular employees. They pointed to Annex D of the CBA, which specifies eligibility for wage increases based on the employee’s regularization date. The union contended that the premature wage increases given to Lanao and Cordovales, who were probationary at the time of the supposed increase, distorted the wage structure. This resulted in their salaries equating those of regular employees, effectively erasing the wage distinction based on merit and seniority. The union sought a corresponding increase in their members’ salaries to maintain the established wage hierarchy.

Chevron, the respondent, countered that the increases were not a violation of the CBA but rather a reflection of adjustments in the company’s hiring rates. They asserted that the hiring rates at the time of Lanao and Cordovales’ employment were higher compared to previous years. This was explained as part of Chevron’s remuneration philosophy of having “similar value for similar jobs,” where salaries and hiring rates are reviewed annually and adjusted based on computed job values. Chevron maintained that there was no wage distortion, as the salary differences were due to varying hiring dates and rates.

The Voluntary Arbitrator ruled in favor of Chevron, finding that PGIEU failed to substantiate its claims of premature wage increases and resultant wage distortion. The Court of Appeals (CA) affirmed this decision, emphasizing the deference given to the factual findings of labor officials with expertise in such matters. The CA held that the Voluntary Arbitrator did not commit grave abuse of discretion in dismissing the union’s complaint.

The Supreme Court, in its decision, agreed with the CA and the Voluntary Arbitrator. The Court emphasized that the increase in the salaries of Lanao and Cordovales was not pursuant to the wage increase agreed upon in the CBA 2007-2012. Rather, it was the result of the increase in hiring rates at the time they were hired. The Court quoted Chevron’s explanation:

Salaries and hiring rates are reviewed annually and adjusted as necessary based on the computed values of each job, an employee’s tenure or seniority in his/her current position will not influence the value of the job.

The Court highlighted the difference in hiring rates between employees hired at different times, using the example of Robert Gawat, who was hired earlier, and Lanao. At the time of Gawat’s hiring, the rate was lower compared to when Lanao was hired. This difference accounted for the salary levels and was not a violation of the CBA.

The Court then addressed the issue of wage distortion, referring to Republic Act No. 6727, which defines it as:

…a situation where an increase in prescribed wage rates results in the elimination or severe contraction of intentional quantitative differences in wage or salary rate between and among employee groups in an establishment as to effectively obliterate the distinctions embodied in such wage structure based on skills, length of service or other logical bases of differentiation.

The Court clarified that Article 124 of the Labor Code only covers wage adjustments and increases due to a prescribed law or wage order. The increase in Lanao and Cordovales’ salaries was not due to a prescribed law or wage order but rather due to the hiring rates at the time of their employment. The Court cited Prubankers Association v. Prudential Bank and Trust Company, which laid down four elements of wage distortion:

• An existing hierarchy of positions with corresponding salary rates;
• A significant change in the salary rate of a lower pay class without a concomitant increase in the salary rate of a higher one;
• The elimination of the distinction between the two levels;
• The existence of the distortion in the same region of the country.

The Court held that the increase in Lanao and Cordovales’ salaries did not meet these elements and was not a result of erroneous application of the CBA but a consequence of higher hiring rates in 2009. The Court also emphasized the importance of management prerogative, which allows employers to regulate all aspects of employment, including setting hiring rates. This prerogative must be exercised in good faith and with due regard to the rights of employees. The Court cited Philippine Airlines, Inc. v. NLRC, noting that labor law does not authorize the substitution of the employer’s judgment in the conduct of its business.

The Court further noted in Bankard Employees Union-Workers Alliance Trade Unions v. National Labor Relations Commission, expanding the interpretation of wage distortion could:

An employer would be discouraged from adjusting the salary rates of a particular group of employees for fear that it would result to a demand by all employees for a similar increase, especially if the financial conditions the business cannot address an across-the-board increase.

In conclusion, the Supreme Court denied the petition, affirming the CA’s decision. The Court reiterated that factual findings of labor officials, who have expertise in matters within their jurisdiction, are generally accorded respect and finality when supported by substantial evidence.

FAQs

What was the key issue in this case?	The key issue was whether Chevron violated the CBA by granting wage increases to probationary employees, leading to wage distortion, or if it was a valid exercise of management prerogative.
Did the Supreme Court find a violation of the CBA?	No, the Supreme Court found that Chevron did not violate the CBA, as the wage increases were due to adjustments in hiring rates rather than an erroneous application of the CBA terms.
What is management prerogative?	Management prerogative refers to the employer’s right to regulate all aspects of employment, including setting hiring rates, as long as it is exercised in good faith and with due regard to employee rights.
What constitutes wage distortion?	Wage distortion occurs when an increase in prescribed wage rates eliminates or severely contracts the intentional quantitative differences in wage rates between employee groups, effectively erasing distinctions based on skills or seniority.
Are all salary differences considered wage distortions?	No, not all salary differences are considered wage distortions. The Labor Code specifies that wage distortion pertains to adjustments due to prescribed laws or wage orders, not market-driven adjustments in hiring rates.
What did the Court say about increasing the wages of other employees?	The Court clarified that a general increase in wages is not automatically required to maintain differences between employees’ salaries unless a genuine wage distortion, as defined by the Labor Code, exists.
Why did the Court uphold the employer’s decision?	The Court upheld the employer’s decision because Chevron demonstrated that the salary adjustments were based on market rates at the time of hiring and were not intended to circumvent the CBA or labor laws.
What is the significance of hiring rates in this case?	Hiring rates are significant because they reflect the employer’s ability to attract qualified candidates based on current market conditions, which can justify salary differences even among employees in similar positions.
What happens if an employer voluntarily increases salary rates?	If an employer voluntarily increases salary rates due to factors like higher productivity or increased competitiveness, it does not automatically trigger a requirement to increase all employees’ salaries.

This case illustrates the importance of balancing CBA terms with the employer’s need to adapt to market conditions. The Supreme Court’s decision provides clarity on the scope of management prerogative in setting hiring rates and helps prevent unwarranted claims of wage distortion when salary adjustments are based on legitimate business reasons.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Philippine Geothermal, Inc. Employees Union (PGIEU) v. Chevron Geothermal Phils. Holdings, Inc., G.R. No. 207252, January 24, 2018